China, Contracts, Intellectual Property

China Product Cloning And The Death Of 'First To Market'

If you do not defend yourself against the clone manufacturers, your product will be drowned out in a sea of imitators.

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chinaIn the 70s and 80s, many product manufacturers (especially those in the shoe and sportswear industries) were of the view that the style or model of their products had only a six- to 12-month shelf life. The approach in those days was to change models regularly so as to beat any copiers to market. So as long as the manufacturers changed their styles every six to 12 months, they could stay ahead of the competition, which consisted mostly of companies much like them. In this world, there was little benefit for a strong contract with non-compete provisions with Chinese manufacturers because Chinese manufacturers were not competition.

Fast forward to today, where copiers can now get their clones to market in a matter of days, not months. This means that strong contracts and IP registrations are now necessary to protect your products and the big shoe and sportswear manufacturers long ago abandoned a first-to-market approach in favor of contract protections and IP registrations.

But when the China lawyers at my firm recommend to our electronics clients that they take advance steps to protect their products from being copied in China, they often push back by using the first-to-market argument. They claim that electronic products come and go and product make-up turns on a dime. There is no time to plan carefully, to register IP, or to use contracts for protection. Those are frills used only by established companies with settled, old-fashioned brands. New market entrants need to focus on designing innovative products and bringing them to market as quickly as possible. Doing that allows us to stay ahead of the clones and the rip-offs, and this is the key to success in today’s market.

Though this argument sounds plausible, it almost never is. The simple truth is that if you have not protected your product design, you probably will not be first to market. You will never make it to market at all, or you will be met in the market by Chinese competitors that will beat you on price, destroying the market for your product. China’s ability to instantly clone means most products have no first-to-market advantage.

There are two types of Chinese factories that will copy your product. The first and most obvious is the factory you hire to make your product. See Your China Factory as your Toughest Competitor. Your manufacturer has access to and control over your molds and tooling. Your manufacturer has developed prototypes of your product and it may even know your future or intended customers. Your manufacturer can at this point quote you an unreasonable manufacturing price or otherwise refuse to make your product and then beat you to market. Or better yet, it can charge you a reasonable price for your product but delay its production so as to beat you to market with your exact product. For more on how all of this so often goes down, check out China and The Internet of Things and How to Destroy Your Own Company.

The other type of Chinese company that will copy your product is one of the many Chinese reverse-engineering companies that focus on the electronics industry. Many of these companies understand that manufacturing a cloned product is not enough; more important is the ability to quickly sell their cloned products. These clone shops have developed a worldwide network of retailers that specialize in selling clones of the most recent innovative products via the internet. Since these manufacturers do not need to worry much about quality control or brand reputation, their clone can often beat your original product to market.

These clone manufacturers ride on the coattails of the legitimate manufacturer, making use of the legitimate manufacturer’s advertising, promotion, and buzz for their own purposes. They set up their system so that internet searches for the original product produce hits for their own cloned product. Since the cloned product is normally substantially cheaper than the legitimate original, they can make strong sales at the very outset of the product release. With Amazon’s recent push to bring on more Chinese sellers, this problem has only gotten worse. See Hundreds of frustrated sellers grilled an Amazon exec over Chinese counterfeit products.

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These clone manufacturers are constantly scanning company websites and sites like Kickstarter and Indiegogo looking for products to clone, and I am aware of instances where they have gone to market with their clones even before the American or European company even has a prototype.

If you do not defend yourself against the clone manufacturers, your product will be drowned out in a sea of imitators and your hard work and innovation and great design will be for nothing. So enough with the first-to-market argument. It neither works for nor applies to the modern world of China manufacturing. You must protect yourself from copying by your manufacturer and from copying by the clone factories. This requires substantial work in IP registration and in written agreements (such as NNN Agreements, Manufacturing Agreements, and Product Development Agreements), all done before you expose your product to the public and certainly before you take it to market. If you don’t do these things, you may never make it to market at all.

Dan Harris is a founding member of Harris Moure, an international law firm with lawyers in Seattle, Portland, San Francisco, Barcelona, and Beijing. He is also a co-editor of the China Law Blog. You can reach him by email at firm@harrismoure.com.

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